UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                     Washington, D.C.  20549

                            FORM 10-Q

[x] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended September 30, 2002March 31, 2003 or [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from __________ to__________to
Commission file number 1-2301 BOSTON EDISON COMPANY (Exact name of registrant as specified in its charter)
Massachusetts 04-1278810 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 800 Boylston Street, Boston,Massachusetts 02199 (Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 617-424-2000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Class Outstanding at November 14, 2002 Common Stock, $1 par value 100Class Outstanding May 6, 2003 Common Stock, $1 per value 75 shares
The Company meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q as a wholly-ownedwholly owned subsidiary and is therefore filing this Form with the reduced disclosure format. Boston Edison Company Form 10-Q - Quarterly Period Ended March 31, 2003
Index Part I. Financial Information Page No. Item 1. Financial Statements - Condensed Consolidated Statements of Income 3 Condensed Consolidated Statements of Retained Earnings 4 Condensed Consolidated Balance Sheets 5 - 6 Condensed Consolidated Statements of Cash Flows 7 Notes to Condensed Consolidated Financial Statements 8 - 13 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13 - 20 Item 4. Controls and Procedures 20 Part II. Other Information Item 1. Legal Proceedings 21 Item 5. Other Information 21 Item 6. Exhibits and Reports on Form 8-K 22 Signature 23 Sarbanes-Oxley Act Section 302(a) Certification Statements 24 - 25
___________________________________ Important Information Boston Edison Company files its Forms 10-K, 10-Q and 8-K reports and other information with the Securities and Exchange Commission (SEC). You may access materials Boston Edison has filed with the SEC free of charge on the SEC's website at www.sec.gov. In addition, certain of Boston Edison's SEC filings can be accessed on NSTAR's website at www.nstaronline.com. Copies of Boston Edison's filings may also be obtained by writing or calling Boston Edison's Investor Relations Department using the address or phone number on the cover of this Form 10-Q. Part I - Financial Information Item 1. Financial Statements
Boston Edison Company Condensed Consolidated Statements of Income (Unaudited) (in thousands) Three Months Ended Nine Months Ended September 30, September 30,March 31, 2003 2002 2001 2002 2001 Operating revenues $468,628 $622,439 $1,265,744 $1,565,356$ 374,060 $ 410,075 Operating expenses: Purchased power 199,435 343,530 625,950 900,490189,829 232,557 Operations and maintenance 56,482 50,426 169,174 143,87053,439 53,730 Depreciation and amortization 43,182 42,576 128,865 126,44142,991 42,779 Demand side management and renewable energy programs 12,344 13,707 34,367 40,764 Taxes - property12,011 11,221 Taxes: Property and other 17,187 16,428 52,828 51,25718,232 18,168 Income taxes 47,550 53,042 76,099 92,93712,800 11,861 Total operating expenses 376,180 519,709 1,087,283 1,355,759329,302 370,316 Operating income 92,448 102,730 178,461 209,59744,758 39,759 Other income (deductions): Other income, net 1,892 816 3,075 4,794666 525 Other deductions, net (33) (474) (257) (1,188)(338) (213) Total other income, net 1,859 342 2,818 3,606328 312 Interest charges: Long term debt 10,878 11,685 33,091 35,21314,976 11,113 Transition property securitization certificates 9,229 10,337 28,359 31,5668,684 9,805 Short-term debt and other 3,016 (476) 7,512 5,382interest 2,457 2,451 Allowance for borrowed funds used during construction (315) (776) (584) (1,951)(58) (171) Total interest charges 22,808 20,770 68,378 70,21026,059 23,198 Net income $ 71,49919,027 $ 82,302 $ 112,901 $ 142,993 ======== ======== ========== ==========16,873 ========= ========= Per share data is not relevant because Boston Edison Company's common stock is wholly-owned by NSTAR. The accompanying notes are an integral part of the condensed consolidated financial statements.
Boston Edison Company Condensed Consolidated Statements of Retained Earnings (Unaudited) (in thousands) Three Months Ended Nine Months Ended September 30, September 30,March 31, 2003 2002 2001 2002 2001 Balance at the beginning of the $412,372 $346,850period $475,993 $428,150 $352,832 period Add: Net income 71,499 82,302 112,901 142,99319,027 16,873 Subtotal 483,871 429,152 541,051 495,825495,020 445,023 Deduct: Dividends declared: Dividends to Parent 25,490 28,100 5,354 84,300 68,927 Preferred stock 490 1,490 1,470 4,470490 Subtotal 25,980 28,590 6,844 85,770 73,397 Provision for preferred stock redemption and issuance costs - 60 - 180 Balance at the end of the period $455,281 $422,248 $455,281 $422,248 ======== ========$469,040 $416,433 ======== ======== The accompanying notes are an integral part of the condensed consolidated financial statements.
Boston Edison Company Condensed Consolidated Balance Sheets (Unaudited) (in thousands) September 30,(Unaudited) March 31, December 31, 2003 2002 2001 Assets Utility plant in service, at original cost $2,682,251 $2,641,759$2,799,582 $2,782,854 Less: accumulated depreciation 846,296 875,158 1,835,955 1,766,601864,602 854,857 1,934,980 1,927,997 Construction work in progress 72,499 38,81844,007 41,944 Net utility plant 1,908,454 1,805,4191,978,987 1,969,941 Equity investments 13,211 13,61111,410 11,592 Current assets: Cash and cash equivalents 17,171 13,5498,240 44,062 Restricted cash 3,616 3,6253,616 Accounts receivable customers, net 201,303 264,633183,843 177,681 Accrued unbilled revenues 40,594 29,08114,337 21,468 Materials and supplies, at average cost 18,109 15,46113,985 13,291 Deferred tax asset - 18,141 Other 295 24,17015,965 5,575 Total current assets 281,088 350,519239,986 283,834 Deferred debits: Regulatory assets - other 685,182 768,776 Regulatory assets - power contracts 265,723 - Prepaid pension cost 238,315 218,7131,233,009 1,265,062 Other 23,571 27,763177,925 178,429 Total assets $3,415,544 $3,184,801 ========== ==========$3,641,317 $3,708,858 ========= ========= The accompanying notes are an integral part of the condensed consolidated financial statements.
Boston Edison Company Condensed Consolidated Balance Sheets (Unaudited) (in thousands) September 30,(Unaudited) March 31, December 31, 2003 2002 2001 Capitalization and Liabilities Common equity: Common stock, par value $1 per share (100(75 shares issued and outstanding) $ - $ - Premium on common stock 528,795 528,795278,795 278,795 Retained earnings 455,281 428,150469,040 475,993 Total common equity 984,076 956,945747,835 754,788 Cumulative non-mandatory redeemable preferred stock 43,000 43,000 Long-term debt 559,705 551,803840,187 840,194 Transition property securitization certificates411,081 445,890 513,904 Total long-term debt 1,005,595 1,065,7071,251,268 1,286,084 Total capitalization 2,032,671 2,065,6522,042,103 2,083,872 Current liabilities: Transition property securitization certificates 59,122 40,97258,405 40,555 Long-term debt 151,238 667275 150,687 Notes payable 176,000 - 191,500 Accounts payable - Affiliates 9,442 73,2433,301 32,450 Other 130,493 91,522122,498 117,600 Accrued interest 5,808 10,73817,752 13,899 Other 112,109 67,09848,565 46,971 Total current liabilities 468,212 475,740426,796 402,162 Deferred credits: Accumulated deferred income taxes 544,296 559,516 Accumulated deferredand unamortized investment tax credits 18,502 19,249614,672 611,469 Power contracts 285,135 22,697312,408 350,117 Other 66,728 41,947245,338 261,238 Total deferred credits 914,661 643,4091,127,418 1,222,824 Commitments and contingencies Total capitalization and liabilities $3,641,317 $ 3,415,544 $ 3,184,801 =========== ===========3,708,858 ========= ========== The accompanying notes are an integral part of the condensed consolidated financial statements.
Boston Edison Company Condensed Consolidated Statements of Cash Flows (Unaudited) (in thousands) NineThree Months Ended September 30,March 31, 2003 2002 2001 Operating activities: Net income $112,901 $142,993$ 19,027 $ 16,873 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 128,865 126,44142,991 42,779 Deferred income taxes and investment tax credits 1,052 (61,696)22,286 20,100 Allowance for borrowed funds used during construction (584) (1,951) Change(58) (171) Net changes in other current assets 73,053 (82,725) Change in other current liabilities (1,021) 82,868 Prepaid pension (19,602) (29,867) Regulatory assets 11,793 (67,496) Other, net 52,942 (19,579)working capital (10,777) (5,907) Deferred debits and credits (63,022) 7,183 Net cash provided by operating activities 359,399 88,98810,447 80,857 Investing activities: Plant expenditures (excluding AFUDC) (159,515) (92,178)(29,093) (54,099) Other investments 400 10,585182 93 Net cash used in investing activities (159,115) (81,593)(28,911) (54,006) Financing activities: Redemptions of long-term debt (150,419) - Transition property securitization certificates redemptions (49,864) (47,628) Capital Contribution - Parent - 66,346 Redemptions of long term debt (61,028) (14,020)(16,959) (16,040) Net change in notes payable - 64,000176,000 10,500 Dividends paid (85,770) (73,397)(25,980) (28,590) Net cash used in financing activities (196,662) (4,699)(17,358) (34,130) Net increasedecrease in cash and cash equivalents 3,622 2,696(35,822) (7,279) Cash and cash equivalents at beginning of year 44,062 13,549 12,125 Cash and cash equivalents at end of period $ 17,1718,240 $ 14,821 ========= =========6,270 ======== ======== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest, net of amounts capitalized $ 66,01322,210 $ 74,267 ========= =========25,572 ======== ======== Income taxes $ 17,6253,681 $ 80,818 ========= =========8,290 ======== ======== The accompanying notes are an integral part of the condensed consolidated financial statements.
Notes to Unaudited Condensed Consolidated Financial Statements (Unaudited) The accompanying Notes should be read in conjunction with Notes to the Consolidated Financial Statements included in Boston Edison's 20012002 Annual Report on Form 10-K. A)NOTE A. Business Organization and Summary of Significant Accounting Policies 1. The Company Boston Edison Company ("Boston Edison" or "the Company") is a regulated public utility incorporated in 1886 under Massachusetts law and is a wholly owned subsidiary of NSTAR. Boston Edison's wholly owned subsidiaries are Harbor Electric Energy Company (HEEC) and BEC Funding LLC. NSTAR is an energy delivery company serving approximately 1.31.4 million customers in Massachusetts, including approximately 1.1 million electric customers in 81 communities and 246,000300,000 gas customers in 51 communities. NSTAR is an exempt public utility holding company.Boston Edison serves approximately 683,000 electric customers in the city of Boston and 39 surrounding cities and towns. NSTAR's retail utility subsidiaries are The Company,Boston Edison, Commonwealth Electric Company (ComElectric), Cambridge Electric Light Company (Cambridge Electric) and NSTAR Gas Company (NSTAR Gas). NSTAR's three retail electric companies operate under the brand name "NSTAR Electric." Reference in this report to "NSTAR Electric" shall mean each of Boston Edison, ComElectric and Cambridge Electric. B)NSTAR has a service company that provides management and support services to substantially all NSTAR subsidiaries - NSTAR Electric & Gas Corporation (NSTAR Electric & Gas). 2. Basis of Presentation The financial information presented as of September 30, 2002March 31, 2003 and for the periods ended September 30,March 31, 2003 and 2002 and 2001 have been prepared from Boston Edison's books and records without audit by independent accountants. Financial information as of December 31, 20012002 was derived from the audited consolidated financial statements of Boston Edison, but does not include all disclosures required by accounting principles generally accepted accounting principlesin the United States of America (GAAP). In the opinion of the Company's management, all adjustments (which are of a normal recurring nature) necessary for a fair presentation of the financial information for the periods indicated have been included. Certain reclassifications have been made to the prior year data to conform with the current presentation. Boston Edison is subject to the Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation" (SFAS 71). The application of SFAS 71 results in differences in the timing of recognition of certain expenses from that of other businesses and industries. The distribution business remains subject to rate-regulation and continues to meet the criteria for application of SFAS 71. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. The results of operations for the three or nine months ended September 30,March 31, 2003 and 2002 and 2001 are not indicative of the results that may be expected for an entire year. Kilowatt-hour sales and revenues are typically higher in the winter and summer than in the spring and fall, as sales tend to vary with weather economic and other variable conditions. C) Critical Accounting Policies The results of operations, as presented on the accompanying financial statements, are based on the application of accounting principles generally accepted in the United States. The application of these principles often requires management to make judgements, assumptions and estimates that may result in different financial presentations.Note B. Asset Retirement Obligations On January 1, 2003, Boston Edison believes that the accounting principles presented herein are critical in terms of understanding its financial statements. These principles include the use of estimates for long-lived assets, equity method investments and long-term obligations. 1. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make judgements, estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Certain of these accounting principles require subjective and complex judgements used in the preparation of financial statements. Accordingly, a different financial presentation could result depending on the judgement, estimates or assumptions that are used. Such estimates and assumptions, include, but are not specifically limited to: depreciation rates set by regulator, amortization terms, future interest rates, future discount rates, mark-to-market valuations, investment returns, impact of new accounting standards, future costs associated with long-term contractual obligations, future compliance costs associated with environmental regulations and continuing creditworthiness of third parties. Actual results could materially differ from these estimates. 2. Pension and Other Postretirement Benefits Boston Edison is the sponsor of NSTAR's Pension Plan (the Plan). As its sponsor, Boston Edison allocates the costs of the Plan among itself and the other NSTAR subsidiary companies based on a percentage of total direct labor charged to the Company. The Company's pension and other postretirement costs are dependent upon several factors and assumptions, such as the discount rate, the long-term rate of return of plan assets and health care trends. The Company's plan assets have been affected by significant declines in the equity markets in the past three years. These conditions are expected to impact the funded status of the Plan at year-end and pension and postretirement costs for 2003. Based on current estimates, the Company anticipates recognizing pension and other postretirement costs for 2003 of $25 million to $55 million above the 2002 level of $37 million. These costs would result in approximately $20 million to $40 million of incremental net pension and other postretirement expenses charged to expense in 2003. Boston Edison will record approximately 60% of the pension and other postretirement costs. As a result of the negative investment performance, it is probable that at December 31, 2002 the accumulated benefit obligation will exceed Plan assets. Therefore, it is also probable that the Company will be required to recognize an additional minimum liability as prescribed by the Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 87, "Employers' Accounting for Pensions" (SFAS 87) and SFAS No. 132, "Employers' Disclosures about Pensions and Postretirement Benefits." The additional minimum liability would result in the removal of Prepaid pension cost from Boston Edison's Consolidated Balance Sheet. The Company's prepaid pension balance was $238 million as of September 30, 2002. The liability and Prepaid pension adjustment would be recorded as a non-cash charge to Other Comprehensive Income (OCI), and would not affect the results of operations for 2002. The charge to OCI would be reversed in future periods at the time that the fair value of the trust assts exceeds the accumulated benefit obligation. Assuming there is no significant change in interest rates or equity market performance for the remainder of the year, the Company anticipates that the after-tax charge to OCI will be approximately $200 million to $300 million. The ultimate impact of the Plan's investment performance on the Company's financial position, results of operations and cash flows will not be known until the Plan's assets and liabilities are valued at December 31, 2002. The Plan currently meets the minimum funding requirements of the Employment Retirement Income Security Act of 1974. However, management is currently evaluating the extent to which it may make additional optional cash contributions to the Plan, the timing of each contribution and the impact on the additional minimum liability. Should management elect to increase the level of its cash contributions to the Plan, such cash requirements could be material to its cash flows. Management believes it has adequate access to capital resources to support these contributions. Pension and other postretirement costs and cash contributions beyond 2003 are largely dependent on the financial markets. In addition, the Company anticipates filing a request with the MDTE seeking an order to mitigate the non-cash charge to OCI and the increases in expected pension and other postretirement benefit costs and cash contributions. If approved, this request could potentially allow the Company to record a regulatory asset in lieu of a charge to OCI. The Company cannot determine whether the request to the MDTE will be approved or whether the approval would be sufficient to record a regulatory asset under SFAS 71. D) Amortization of Merger Related Costs The merger creating NSTAR was accounted for under the purchase method of accounting and resulted in the recognition of an acquisition premium (goodwill). An integral part of the merger is the rate plan of the combined retail utility subsidiaries that was approved by the Massachusetts Department of Telecommunications and Energy (MDTE) in July 1999. Significant elements of the rate plan include a four-year distribution rate freeze through August 2003, recovery of the acquisition premium (goodwill) of approximately $490 million over 40 years resulting in annual amortization of approximately $12.2 million, and recovery of filed costs to achieve (CTA) of $111 million over 10 years. CTA are the costs incurred to execute the merger including the employee costs for a voluntary severance program, costs of financial advisers, legal costs, and other transaction and systems integration costs. Boston Edison expects to be required by the MDTE to reconcile the actual CTA costs incurred with the original estimate. This reconciliation will include a final accounting of the deductibility for income tax purposes of each component of CTA. The total actual consolidated NSTAR CTA is approximately $143 million, with the majority of these costs to be allocated to Boston Edison. This increase from the original estimate is partially mitigated by the fact that the portion of CTA that is not deductible for income tax purposes is approximately $20 million lower than the original estimate. The CTA and goodwill amounts were filed and approved as part of the rate plan. The annual allocation of CTA amortization expense to the Company is approximately $7.2 million. As disclosed in Boston Edison's Form 10-K for the year ended December 31, 2001, NSTAR expected that it would transfer $319 million of goodwill to its reporting unit, as a component of Boston Edison's common equity, effective January 1, 2002. However, upon further review and consideration of all the transition provisions of the Financial Accounting Standards Board's (FASB) Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets" (SFAS 142), NSTAR has determined it will continue to account for goodwill by the acquired entities as it has done since the date of the merger. The annual allocation of goodwill amortization expense to the Company is approximately $8 million. For regulatory purposes, Boston Edison has been allocated $319 million of goodwill and is expensing this amount over 40 years. This amount is being recovered from Boston Edison's customers and will continue to be treated as an intercompany charge among the Company and its affiliated companies, ComElectric, Cambridge Electric and NSTAR Gas. E) New Accounting Standards On July 5, 2001, the FASB issuedadopted SFAS No. 143, "Accounting for Asset Retirement Obligations" (SFAS 143). This Statement establishes accounting and reporting standards for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. It applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or the normal operation of a long-lived asset, except for certain obligations of lessees. SFAS 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is effectiveincurred. When the liability is initially recorded, the entity capitalizes the cost by increasing the carrying amount of the related long- lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. Boston Edison has not identified any long-lived assets to which there is a legal obligation to remove such assets. The recognition of a potential asset retirement obligation would have had no impact on its earnings. The Company, which follows SFAS 71, would have established regulatory assets or liabilities to defer any differences between the liabilities established for ratemaking purposes and those recorded as required under SFAS 143. For Boston Edison, cost of removal (negative net salvage) is recognized as a component of depreciation expense in accordance with approved regulatory treatment. Since Boston Edison applies SFAS 71, it will continue to include removal costs in depreciation expense and will quantify the removal costs included in accumulated depreciation as regulatory liabilities in footnote disclosure. The Company estimates that at March 31, 2003, there is approximately $145 million of removal costs, not yet incurred, included in accumulated depreciation. Note C. Derivative Instruments - Power Contracts Boston Edison accounts for its power contracts in accordance with SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133). The accounting for derivative financial instruments is subject to change based on the guidance received from the Derivative Implementation Group (DIG) of FASB. The DIG issued No. C15, "Scope Exceptions: Normal Purchases and Normal Sales Exception for Option-Type Contracts and Forward Contracts in Electricity," which specifically addressed the interpretation of clearly and closely related contracts that qualify for the normal purchases and sales exception under SFAS 133. The conclusion reached by the DIG was that contracts with a pricing mechanism that is subject to future adjustment based on a generic index that is not specifically related to the contracted service commodity generally would not qualify for the normal purchases and sales exception. Boston Edison has one purchased power contract that contains components with a pricing mechanism that is based on a pricing index, such as the GNP or CPI. Although these factors are only applied to certain ancillary pricing components of this agreement, as required by the interpretation of DIG Issue C15, Boston Edison began recording this contract at fair value on its Consolidated Balance Sheets during 2002. This action resulted in the recognition of a liability for the fair value of the above- market portion of this contract at March 31, 2003 and December 31, 2002 of approximately $258 million and $305 million, respectively, and is a component of Deferred credits - Power contracts on the accompanying Condensed Consolidated Balance Sheets. The decline in above-market costs during the current period was primarily due to an increase in wholesale energy prices during the first quarter. Boston Edison has recorded a corresponding regulatory asset to reflect the future recovery of the above-market component of this contract through its transition charge. Therefore, as a result of this regulatory treatment, the recording of this contract on the Company's accompanying Condensed Consolidated Balance Sheets does not result in an earnings impact. Note D. Other Utility Matters 1. Service Quality Index On February 28, 2003, Boston Edison filed its 2002 Service Quality Report with the Massachusetts Department of Telecommunications and Energy (MDTE) that reflected significant improvements in reliability and performance and indicated that no penalty should be assessed for the 2002 period. These penalties are monitored on a monthly basis to determine the Company's contingent liability, and if the Company determines it is probable that a liability has been incurred and is estimable, the Company would then accrue an appropriate liability. Annually, each NSTAR utility subsidiary makes a service quality performance filing with the MDTE. Any settlement or rate order that would result in a different liability (or credit) level from what has been accrued would be adjusted in the period when such settlement or rate order is issued. Through March 31, 2003, Boston Edison's performance has met or exceeded the applicable established benchmarks; however, these results may not be indicative of the results that may be expected for the remainder of the year, including the peak-demand period anticipated during the summer period. 2. Regulatory Proceedings In December 2002, NSTAR Electric filed proposed transition rate adjustments for 2003, including a preliminary reconciliation of transition, transmission, standard offer and default service costs and revenues through 2002. The MDTE approved tariffs for each retail electric subsidiary effective January 1, 2003. The filings were updated in February 2003 to include final costs and revenues for 2002. On April 24, 2003, NSTAR Electric received approval from the MDTE for a Standard Offer Service Fuel Adjustment of $0.902 per kilowatt-hour to be effective May 1, 2003. The increase in rates is in response to continuing high wholesale costs. In the past, the MDTE has allowed companies to adjust to rapidly changing market costs of oil and natural gas used to generate electricity. In accordance with that order, Boston Edison implemented the adjustment in January 2001 as energy prices soared on world markets and reduced the charge back to zero in April 2002 when market energy costs dropped. The Boston Edison Standard Offer Service Fuel Adjustment remained at zero for the past year. The MDTE has ruled that these fuel index adjustments are excluded from the 15% rate reduction requirement under the 1997 Massachusetts Restructuring Act (Restructuring Act). Note E. Income Taxes Income taxes are accounted for in accordance with SFAS No. 109, "Accounting for Income Taxes" (SFAS 109). SFAS 109 requires the recognition of deferred tax assets and liabilities for the future tax effects of temporary differences between the carrying amounts and the tax basis of assets and liabilities. In accordance with SFAS 109, net regulatory assets include $60 million and $60.3 million of deferred tax assets and corresponding amounts in accumulated deferred income taxes that were recorded as of March 31, 2003 and December 31, 2002, respectively. The regulatory assets represent the additional future revenues to be collected from customers for deferred income taxes.
The following table reconciles the statutory federal income tax rate to the annual estimated effective income tax rate for 2003 and the actual effective income tax rate for the year ended December 31, 2002: 2003 2002 Statutory tax rate 35.0% 35.0% State income tax, net of federal income tax benefit 4.4 4.4 Investment tax credit amortization (0.5) (0.5) Other 1.9 1.9 Effective tax rate 40.8% 40.8% ==== ====
Note F. Commitments and Contingencies 1. Environmental Matters As of March 31, 2003, Boston Edison is involved in 10 state- regulated properties ("Massachusetts Contingency Plan, or "MCP" sites") where oil or other hazardous materials were previously spilled or released. Boston Edison is required to clean up or otherwise remediate these properties in accordance with specific state regulations. There are uncertainties associated with the remediation costs due to the final selection of the specific cleanup technology and the particular characteristics of the different sites. Estimates of approximately $0.4 million are included as liabilities in the accompanying Condensed Consolidated Balance Sheets at March 31, 2003 and December 31, 2002. In addition to the MCP sites, Boston Edison also faces possible liability as a result of involvement in 8 multi-party disposal sites or third party claims associated with contamination remediation. Boston Edison generally expects to have only a small percentage of the total potential liability for these sites. Estimates of approximately $3.3 million are included as liabilities in the accompanying Condensed Consolidated Balance Sheets at March 31, 2003 and December 31, 2002. Accordingly, the MCP and multi-party disposal site amounts have not been reduced by any potential rate recovery treatment of these costs or any potential recovery from Boston Edison's insurance carriers. Prospectively, should Boston Edison be allowed to collect these specific costs from customers, it would record an offsetting regulatory asset and record a credit to operating expenses equal to previously expensed costs. Based on its assessments of the specific site circumstances, management does not believe that it is probable that any such additional costs will have a material impact on Boston Edison's consolidated financial position. Estimates related to environmental remediation costs are reviewed and adjusted periodically as further investigation and assignment of responsibility occurs and as either additional sites are identified or Boston Edison's responsibilities for such sites evolve or are resolved. Boston Edison's ultimate liability for future environmental remediation costs may vary from these estimates. Boston Edison's management does not believe that its current assessment of its environmental responsibilities, existing legal requirements and regulatory policies, will have a material adverse effect on Boston Edison's consolidated financial position or results of operations for a reporting period. 2. Legal Proceedings In the normal course of its business, Boston Edison and its subsidiaries are involved in certain legal matters, including civil litigation. Management is unable to fully determine a range of reasonably possible court-ordered damages, settlement amounts, and related litigation costs ("legal liabilities") that would be in excess of amounts accrued. Based on the information currently available, Boston Edison does not believe that it is probable that any such additional legal liability will have a material impact on its consolidated financial position. However, it is reasonably possible that additional legal liabilities that may result from changes in estimates could have a material impact on its results of operations for a reporting period. Note G. Subsequent Event Pension and Postretirement Benefit Obligations Other Than Pensions (PBOP) Adjustment Mechanism Tariff Filing On April 16, 2003, Boston Edison submitted a request to the MDTE for approval to establish a reconciliation adjustment mechanism to provide for the recovery of costs associated with the Company's obligations to provide its employees pension benefits and PBOP. The Company's proposal is intended to give effect to the accounting treatment previously approved by the MDTE, through a reconciling ratemaking mechanism that will provide rate stability and ensure that customers pay no more or no less than the amounts needed to extend pension and PBOP benefits to the Company's employees. In addition, this mechanism will ensure that the financial integrity of the Company is not impaired by financial reporting requirements and cash flow issues that arise from the extreme volatility of pension and PBOP funding obligations. The Company's proposed reconciliation adjustment mechanism does not result in any immediate change (increase or decrease) in prices paid by customers and allows the Company to recover the same types of pension and PBOP costs that have always been recovered in rates. In addition, the proposed reconciliation adjustment mechanism removes the extreme volatility in rates that may be the result of requirements of existing financial accounting standards, provides for more timely recovery of costs from or refunds of gains to customers, provides for an annual filing, true-up and review by the MDTE, carves out pension and PBOP costs from regular distribution rates so that the MDTE may review them annually, and ensures that benefit trust funds are sufficient to provide the Company's employees with the benefits to which they are entitled. The MDTE has historically permitted the recovery of prudently incurred expenditures relating to pension and PBOP benefits for the Company's employees. The Company consistently contributes to trust funds that hold and invest the contributions until benefits are paid. The Company is requesting that the MDTE approve the reconciliation adjustment mechanism by August 1, 2003. The Company cannot determine the timing and ultimate outcome of this request. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) The accompanying MD&A should be read in conjunction with the MD&A in Boston Edison's 2002 Annual Report on Form 10-K. Overview Boston Edison Company ("Boston Edison" or "the Company") is a regulated public utility incorporated in 1886 under Massachusetts law and is a wholly owned subsidiary of NSTAR. Boston Edison's wholly owned subsidiaries are Harbor Electric Energy Company (HEEC) and BEC Funding LLC. NSTAR is an energy delivery company serving approximately 1.4 million customers in Massachusetts, including approximately 1.1 million electric customers in 81 communities and 300,000 gas customers in 51 communities. Boston Edison serves approximately 683,000 electric customers in the city of Boston and 39 surrounding communities. NSTAR's retail utility subsidiaries are Boston Edison, Commonwealth Electric Company (ComElectric), Cambridge Electric Light Company (Cambridge Electric) and NSTAR Gas Company (NSTAR Gas). Its wholesale electric subsidiary is Canal Electric Company (Canal). NSTAR's three retail electric companies operate under the brand name "NSTAR Electric." Reference in this report to "NSTAR Electric" shall mean each of Boston Edison, ComElectric and Cambridge Electric. NSTAR has a service company that provides management and support services to substantially all NSTAR subsidiaries - NSTAR Electric & Gas Corporation (NSTAR Electric & Gas). Cautionary Statement This MD&A contains certain forward-looking statements such as forecasts and projections of expected future performance or statements of management's plans and objectives. These statements are based on the current expectations, estimates or projections of management and are not guarantees of future performance. Some or all of these forward-looking statements may not turn out to be what the Company expected. Actual results could potentially differ materially from these statements. Therefore, no assurance can be given that the outcomes stated in such forward-looking statements and estimates will be achieved. The effects of cost control procedures, changes in weather, economic conditions, tax rates, interest rates, technology, and prices and availability of operating supplies could materially affect actual results quarter to quarter and projected operating results. Boston Edison's forward-looking information is based in large measure on prevailing governmental policies and regulatory actions, including those of the Massachusetts Department of telecommunications and Energy (MDTE) and the Federal Energy Regulatory Commission (FERC), with respect to allowed rates of return, rate structure, continued recovery of regulatory assets, financings, purchased power and cost of gas recovery, acquisition and disposition of assets, operation and construction of facilities, changes in tax laws and policies and changes in and compliance with environmental and safety laws and policies. The impacts of various environmental, legal, and regulatory matters could differ from current expectations. You are advised to consider all further disclosures Boston Edison makes in its filings to the Securities and Exchange Commission (SEC). This report also describes changes to Boston Edison's material contingencies and critical accounting policies and estimates in this MD&A and in the accompanying Notes to Condensed Consolidated Financial Statements, and Boston Edison encourages you to review these disclosures. You are also advised to consider the "Cautionary Statements" Boston Edison made in its 2002 Annual Report on Form 10-K. Critical Accounting Policies and Estimates For a complete discussion of critical accounting policies, refer to "Critical Accounting Policies and Estimates" in Item 7 of Boston Edison's 2002 Form 10-K. There have been no substantive changes to those policies and estimates. Asset Retirement Obligations On January 1, 2003, the Company adopted SFAS No. 143, "Accounting for Asset Retirement Obligations" (SFAS 143). This Statement establishes accounting and reporting standards for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. It applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or the normal operation of a long-lived asset, except for certain obligations of lessees. SFAS 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, the entity capitalizes the cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. Management is currently assessing the impact of SFAS 143 in light of its regulatory and accounting requirements. ManagementThe Company has not identified several minorany long-lived assets including lease arrangements, and has determined that itto which there is legally responsiblea legal obligation to remove such property and comply with the requirementassets. The recognition of this standard. However, based on Boston Edison's assessment of itsa potential liability and rate regulatory treatment for the identified assets, the adoption of SFAS 143 is not expected toasset retirement obligation would have an effect on its results of operations, cash flows, or financial position. SFAS No. 144, "Accounting for the Impairment or Disposal of Long- Lived Assets" (SFAS 144), was effective January 1, 2002, and addresses accounting and reporting for the impairment or disposal of long-lived assets. SFAS 144, among other things, expands the reporting of discontinued operations to include all components of an entity with operations that can be distinguished from the rest of the entity and that will be eliminated from the ongoing operations of the entity in a disposal transaction. The implementation of SFAS 144 had no effect on Boston Edison's results of operations or financial position. The FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" (SFAS 146) that requires entities to record a liability for costs related to exit or disposal activities when the costs are incurred. Previous accounting guidance required the liability to be recorded at the date of commitment to an exit or disposal plan. Boston Edison is required to comply with SFAS 146 beginning January 1, 2003. Boston Edison anticipates that the implementation of this standard will not have an adverse impact on its financial positionearnings. The Company, which follows SFAS 71, would have established regulatory assets or results of operations. As of January 1, 2001,liabilities to defer any differences between the liabilities established for ratemaking purposes and those recorded as required under SFAS 143. For Boston Edison, adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities",cost of removal (negative net salvage) is recognized as amended by SFAS Nos. 137 and 138, (collectively, SFAS 133). SFAS 133 established accounting and reporting standards requiring every derivative instrument (including certain derivative instruments embedded in such contracts as fixed-price fuel supply and power contracts) be recorded on the Consolidated Balance Sheets as either an asset or liability measured at its fair value. Previously, all of Boston Edison's commodity purchased power contracts were exempt from this accounting treatment under the normal purchase and sales exception of SFAS 133. As a result, these contracts were not marked to market and have not been reflected on the accompanying Condensed Consolidated Balance Sheets. Refer to Note F "Derivative Instruments" for further discussion. F) Derivative Instruments Boston Edison adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133), effective January 1, 2001. The accounting for derivative financial instruments is subject to change based on the guidance received from the Derivative Implementation Group (DIG) of FASB. The DIG issued C15, on October 10, 2001, which specifically addressed the interpretation of clearly and closely related contracts that qualify for the normal purchase and sales exception under SFAS 133. The conclusion reached by the DIG was that contracts with a pricing mechanism that is subject to future adjustment based on a generic index that is not specifically related to the contracted service commodity, generally would not qualify for the normal purchase and sales exception. On April 1, 2002, the effective date of DIG C15, Boston Edison adopted the interpretation of this guidance and began marking to market certain of its long-term purchased power contracts that previously qualified for the normal purchase and sale exception. Boston Edison has one purchased power contract that contains components with pricing mechanisms that are based on a generic index, such as the GNP or CPI and are applied to in significant factors of these agreements. Therefore, as required by the interpretation of C15, Boston Edison has recorded this contract at fair value on its accompanying Condensed Consolidated Balance Sheets beginning in the second quarter of 2002. This action resulted in the recognition of a liability for the fair value of the above-market portion of this contract as of September 30, 2002 of approximately $266 million and is a component of Power contracts on the accompanying Condensed Consolidated Balance Sheets.depreciation expense in accordance with approved regulatory treatment. Since Boston Edison has recordedapplies SFAS 71, it will continue to include removal costs in depreciation expenses and will quantify the removal costs included in accumulated depreciation as regulatory liabilities in footnote disclosure. The Company estimates that at March 31, 2003, there is approximately $145 million of removal costs, note yet incurred, included in accumulated depreciation. Rate and Regulatory Proceedings a. Pension and Postretirement Benefit Obligations Other Than Pensions (PBOP) On April 16, 2003, Boston Edison submitted a corresponding regulatory assetrequest to reflect the futureMDTE for approval to establish a reconciliation adjustment mechanism to provide for the recovery of costs associated with the above-market componentCompany's obligations to provide its employees pension benefits and PBOP. The Company's proposal is intended to give effect to the accounting treatment previously approved by the MDTE, through a reconciling ratemaking mechanism that will provide rate stability and ensure that customers pay no more or no less than the amounts needed to extend pension and PBOP benefits to the Company's employees. In addition, this mechanism will ensure that the financial integrity of this contract through its transition charge. Therefore, as a resultthe Company is not impaired by financial reporting requirements and cash flow issues that arise from the extreme volatility of this regulatory treatment, the recording of this contract on its accompanying Condensed Consolidated Balance Sheetspension and PBOP funding obligations. The Company's proposed reconciliation adjustment mechanism does not result in any immediate change (increase or decrease) in prices paid by customers and allows the Company to recover the same types of pension and PBOP costs that have always been recovered in rates. In addition, the proposed reconciliation adjustment mechanism removes the extreme volatility in rates that may be the result of requirements of existing financial accounting standards (SFAS Nos. 87 and 106), provides for more timely recovery of costs from or refunds of gains to customers, provides for an earnings impact.annual filing, true-up and review by the MDTE, carves out pension and PBOP costs from regular distribution rates so that the MDTE may review them annually, and ensures that benefit trust funds are sufficient to provide NSTAR employees with the benefits to which they are entitled. The MDTE has historically permitted the recovery of prudently incurred expenditures relating to pension and PBOP benefits for the Company's employees. The Company consistently contributes to trust funds that hold and invest the contributions until benefits are paid. The Company is requesting that the MDTE approve the reconciliation adjustment mechanism by August 1, 2003. The Company cannot determine the timing and ultimate outcome of this request. This action does not preclude Boston Edison has other purchased power contractsfrom pursuing a general base rate increase in which the fair value is significantly above-market. However, these contracts have metfuture. Boston Edison's four- year rate freeze expires in the criteria for normal purchase and sales exception pursuant to SFAS 133 and C15 and have not been recorded on the accompanying Condensed Consolidated Balance Sheets. The above market portionthird quarter of this contract is currently being recovered through the transition charge. Boston Edison will continue to monitor any further guidance that may result from FASB revisions and clarifications to SFAS 133. Based on Boston Edison's assessment to date, the adoption of SFAS 133 has not had a material effect on its results of operations, cash flows, or net assets. G)year. b. Service Quality Index On October 29, 2001, and as subsequently updated, NSTAR ElectricFebruary 28, 2003, Boston Edison filed proposed service quality plans for each companyits 2002 Service Quality Report with the MDTE which included guidelines that had been established by the MDTE as a result of its generic investigation of service quality issues. The service quality plans established performance benchmarks effective January 1, 2002 for certain identified measures of service quality relating to customer service and billing performance, customer satisfaction, andreflected significant improvements in reliability and safety performance. NSTAR Electric is required to report annually concerning its performance as to each measure and is subject to maximum penalties of up to two percent of transmission and distribution revenuesindicated that no penalty should performance fail to meet the applicable benchmarks. NSTAR Electric also filed with the MDTE a report concerning its performance on the identified service quality measuresbe assessed for the two twelve-month periods ended August 31, 2000 and 2001. This report included a calculation of penalties in accordance with MDTE guidelines as if such guidelines were in effect during the2002 period. On March 22, 2002, following hearings on the matter, the MDTE issued an order imposing a service quality penalty of approximately $3.25 million on NSTAR Electric of which $3.2 million related specifically to Boston Edison that was refunded to customers as a credit to their bills during the month of May 2002. As a result of the accrual for this estimated penalty during 2001, this refund had no effect on Boston Edison's consolidated financial position or results of operations in 2002. Through September 30, 2002 Boston Edison's performance has resulted in a minimal penalty situation based on both actual results through September 2002 and forecasted results for the remaining three-month period. However, these results may not be indicative of the results for the remainder of the year. Boston Edison accounts for its service quality penalties pursuant to SFAS No. 5, "Accounting for Contingencies." Accordingly, theseThese penalties are monitored on a monthly basis to determine Boston Edison'sthe Company's contingent liability, and if Boston Edisonthe Company determines it is probable that a liability has been incurred and is estimable, Boston Edisonthe Company would then accrue an appropriate liability. Annually, each NSTAR Electric company, including Boston Edison,utility subsidiary makes a service quality performance filing with the MDTE. Any settlement or rate order that would result in a different liability (or credit) level from what has been accrued would be adjusted in the period an agreementwhen such settlement or rate order is received from the MDTE. H) Contingencies 1. Merger Rate Appeal The 1999 MDTE order, which approved the rate plan associated with the merger of BEC and COM/Energy, was appealed by certain parties to the Massachusetts Supreme Judicial Court (SJC). In October 2001, the MDTE certified the record of the case to the SJC. The appeals of the Massachusetts Attorney General (AG) and a separate group that consists of The Energy Consortium (TEC) and Harvard University (Harvard) are pending. On June 21, 2002, TEC and Harvard filed their joint initial brief with the SJC and on June 24, 2002, the AG filed a brief in the consolidated proceeding. TEC and Harvard allege that, in approving the rate plan and merger proposal, the MDTE committed errors of law in the following areas: (1) in adopting a public interest standard, the MDTE applied the wrong standard of review, and failed to investigate the propriety of rates and to determine that the resulting rates of Boston Edison, Cambridge Electric, ComElectric and NSTAR Gas were just and reasonable; (2) that in permitting Cambridge Electric and ComElectric to adjust their rates by $49.8 million to reflect demand-side management costs, the MDTE failed to determine whether such an adjustment was warranted in light of other cost decreases; (3) that the MDTE's approval results in an arbitrary and unjustified sharing of benefits and costs between ratepayers and shareholders; and (4) that the MDTE's approval of the rate plan guarantees shareholders recovery of future costs without any future demonstration of customer savings. The AG's brief includes similar arguments in each of these areas and adds that, in allowing recovery of the acquisition premium, the MDTE has improperly deviated from a cost basis in setting approved rates and the ratemaking policies in other jurisdictions. Responsive briefs from NSTAR and the MDTE were filed on August 30, 2002 and September 9, 2002, respectively. Reply briefs were filed by TEC/Harvard and the AG on September 27, 2002 and October 3, 2002, respectively. On November 4, 2002, oral arguments occurred before the SJC. Management is currently unable to determine the outcome of this proceeding. Boston Edison intends to vigorously defend its position relative to this appeal. However, if an unfavorable outcome were to occur, there could be a material adverse impact on business operations, the consolidated financial position, cash flows and the results of operations for the reporting period in which the unfavorable outcome occurs. 2. Environmental Matters Boston Edison is involved in approximately 14 state-regulated properties ("Massachusetts Contingency Plan, or "MCP sites") where oil or other hazardous materials were previously spilled or released. Boston Edison is required to clean up or otherwise remedy these properties in accordance with specific state regulations. There are uncertainties associated with the remediation costs due to the final selection of the specific cleanup technology and the particular characteristics of the different sites. In addition to the MCP sites, Boston Edison also faces possible liability as a potentially responsible party (PRP) in the cleanup of five multi-party hazardous waste sites in Massachusetts and other states where it is alleged to have generated, transported or disposed of hazardous waste at the sites. Boston Edison generally expects to have only a small percentage of the total potential liability for these sites. Approximately $4.7 million and $4.8 million are included as liabilities in the accompanying Condensed Consolidated Balance Sheets at September 30, 2002 and Decemberissued. Through March 31, 2001, respectively, related to the non-recoverable portion of these cleanup liabilities and is the gross amount of NSTAR's estimated environmental clean-up obligations that is not certain to be recoverable in rates. Accordingly, this amount has not been reduced by any potential rate recovery treatment of these costs or any potential recovery from the company's insurance carriers. Prospectively, should NSTAR be allowed regulatory rate recovery of these specific costs, it would record an offsetting regulatory asset and record a credit to operating expenses equal to previously expensed costs. Based on its assessments of the specific site circumstances, management does not believe that it is probable that any such additional costs will have a material impact on2003, Boston Edison's consolidated financial position. Estimates related to environmental remediation costs are reviewed and adjusted periodically as further investigation and assignment of responsibility occurs and as either additional sites are identifiedperformance has met or Boston Edison's responsibilities for such sites are resolved. Boston Edison is unable to estimate its ultimate liability for future environmental remediation costs. However, in view of Boston Edison's current assessment of its environmental responsibilities, existing legal requirements and regulatory policies, management does not believe that these matters will have a material adverse effect on Boston Edison's financial position or results of operations for a reporting period. 3. Legal Proceedings In the normal course of its business, Boston Edison and its subsidiaries are also involved in certain legal matters, including civil lawsuits. Management is unable to fully determine a range of reasonably possible court-ordered damages, settlement amounts, and related litigation costs ("legal liabilities") that would be in excess of amounts accrued. Based on the information currently available, the Company does not believe that it is probable that any such additional legal liability will have a material impact on its consolidated financial position. However, it is reasonably possible that additional legal liabilities costs that may result from changes in estimates could have a material impact on its results of operations for a reporting period. I) Income Taxes Income taxes are accounted for in accordance with SFAS No. 109, "Accounting for Income Taxes" (SFAS 109). SFAS 109 requires the recognition of deferred tax assets and liabilities for the future tax effects of temporary differences between the carrying amounts and the tax basis of assets and liabilities. In accordance with SFAS 109, net regulatory assets include $61.2 million and $62.1 million of deferred tax assets and corresponding amounts in accumulated deferred income taxes that were recorded as of September 30, 2002 and December 31, 2001, respectively. The regulatory assets represent the additional future revenues to be collected from customers for deferred income taxes. The following table reconciles the statutory federal income tax rate to the annual estimated effective income tax rate for 2002 and the actual effective income tax rate for the year ended December 31, 2001:
2002 2001 Statutory tax rate 35.0% 35.0% State income tax, net of federal income tax benefit 4.4 4.4 Investment tax credits (0.4) (0.4) Other 2.1 1.8 Effective tax rate 41.1% 40.8% ==== ====
J) Subsequent Events Long-Term Debt Issuance On October 15, 2002, Boston Edison sold $400 million of 4.875% 10- year debentures and $100 million of 3-year floating rate debentures priced at LIBOR plus 50 basis points. The net proceeds were used to repay consolidated outstanding short-term debt balances. For financial reporting purposes, short-term debt has been reclassified on the accompanying Condensed Consolidated Balance Sheets as Long-term debt. Item 2. Management's Discussion and Analysis of Results of Operations The accompanying Management's Discussion and Analysis (MD&A) should be read in conjunction with the MD&A in Boston Edison's 2001 Annual Report on Form 10-K. Overview Boston Edison Company ("Boston Edison" or "the Company") is a regulated public utility incorporated in 1886 under Massachusetts law and is a wholly owned subsidiary of NSTAR. Boston Edison's wholly owned subsidiaries are Harbor Electric Energy Company (HEEC) and BEC Funding LLC. NSTAR is an energy delivery company serving approximately 1.3 million customers in Massachusetts, including approximately 1.1 million electric customers in 81 communities and 246,000 gas customers in 51 communities. NSTAR is an exempt public utility holding company. NSTAR's retail utility subsidiaries are Boston Edison Company (Boston Edison), Commonwealth Electric Company (ComElectric), Cambridge Electric Light Company (Cambridge Electric) and NSTAR Gas Company (NSTAR Gas). Its wholesale electric subsidiary is Canal Electric Company (Canal). NSTAR's three retail electric companies operate under the brand name "NSTAR Electric." Reference in this report to "NSTAR Electric" shall mean each of Boston Edison, ComElectric and Cambridge Electric. NSTAR's non-utility operations include telecommunications - NSTAR Communications, Inc. (NSTAR Com), district heating and cooling operations (Advanced Energy Systems, Inc. and NSTAR Steam Corporation) and a liquefied natural gas service company (Hopkinton LNG Corp.). Cautionary Statement This Management's Discussion and Analysis contains certain forward-looking statements such as forecasts and projections of expected future performance or statements of management's plans and objectives. These forward-looking statements may also be contained in filings with the Securities and Exchange Commission (SEC) and in press releases and oral statements. You can identify these statements by the fact that they do not relate strictly to historical or current facts. They use words such as "anticipate," "estimate," "expect," "project," "intend," "plan," "believe" and other words and terms of similar meaning in connection with any discussion of future operating or financial performance. These statements are based on the current expectations, estimates or projections of management and are not guarantees of future performance. Some or all of these forward- looking statements may not turn out to be what the Company expected. Actual results could potentially differ materially from these statements. Therefore, no assurance can be given that the outcomes stated in such forward-looking statements and estimates will be achieved. The impact of continued cost control procedures on operating results could differ from current expectations. Boston Edison's revenues from its electric sales are weather-sensitive, particularly sales to residential and commercial customers. Accordingly, Boston Edison's sales in any given period reflect, in addition to other factors, the impact of weather, with warmer temperatures generally resulting in increased electric sales. Boston Edison anticipates that these sensitivities to seasonal and other weather conditions will continue to impact its sales forecasts in future periods. The effects of changes in weather, economic conditions, tax rates, interest rates, technology, prices and availability of operating supplies could materially affect the projected operating results. Boston Edison's forward-looking information depends in large measure on prevailing governmental policies and regulatory actions, including those of the Massachusetts Department of Telecommunications and Energy (MDTE) and the Federal Energy Regulatory Commission (FERC), with respect to allowed rates of return, rate structure, financings, purchased power recovery, acquisition and disposition of assets, operation and construction of facilities, changes in tax laws and policies and changes in and compliance with environmental and safety laws and policies. The impacts of various environmental, legal issues, and regulatory matters could differ from current expectations. New regulations or changes to existing regulations could impose additional operating requirements or liabilities other than expected. The effects of changes in specific hazardous waste site conditions and the specific cleanup technology could affect the estimated cleanup liabilities. The impacts of changes in available information and circumstances regarding legal issues could affect any estimated litigation costs. Boston Edison undertakes no obligation to publicly update forward- looking statements, whether as a result of new information, future events, or otherwise. You are advised, however, to consult any further disclosures Boston Edison makes in its filings to the SEC. Also note that Boston Edison provides in the above paragraphs a cautionary discussion of risks and other uncertainties relative to its business. These are factors that could cause its actual results to differ materially from expected and historical performance. Other factors in addition to those listed here could also adversely affect Boston Edison. Amortization of Merger Related Costs The merger creating NSTAR was accounted for under the purchase method of accounting and resulted in the recognition of an acquisition premium (goodwill). An integral part of the merger is the rate plan of the combined retail utility subsidiaries that was approved by the Massachusetts Department of Telecommunications and Energy (MDTE) in July 1999. Significant elements of the rate plan include a four-year distribution rate freeze through August 2003, recovery of the acquisition premium (goodwill) of approximately $490 million over 40 years resulting in annual amortization of approximately $12.2 million, and recovery of filed costs to achieve (CTA) of $111 million over 10 years. CTA are the costs incurred to execute the merger including the employee costs for a voluntary severance program, costs of financial advisers, legal costs, and other transaction and systems integration costs. Boston Edison expects to be required by the Massachusetts Department of Telecommunications and Energy (MDTE) to reconcile the actual CTA costs incurred with the original estimate. This reconciliation will include a final accounting of the deductibility for income tax purposes of each component of CTA. The total actual consolidated NSTAR CTA is approximately $143 million, with the majority of these costs to be allocated to Boston Edison. This increase from the original estimate is partially mitigated by the fact that the portion of CTA that is not deductible for income tax purposes is approximately $20 million lower than the original estimate. The CTA and goodwill amounts were filed and approved as part of the rate plan. The annual allocation of CTA amortization expense to the Company is approximately $7.2 million. As disclosed in Boston Edison's Form 10-K for the year ended December 31, 2001, NSTAR expected that it would transfer $319 million of goodwill to its reporting unit, as a component of Boston Edison's common equity, effective January 1, 2002. However, upon further review and consideration of all the transition provisions of the Financial Accounting Standards Board's (FASB) Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets" (SFAS 142), NSTAR has determined it will continue to account for goodwill by the acquired entities as it has done since the date of the merger. For regulatory purposes, Boston Edison has been allocated $319 million of goodwill and is expensing this amount over 40 years. This amount is being recovered from Boston Edison's customers and will continue to be treated as an intercompany charge among the Company and its affiliated companies, ComElectric, Cambridge Electric and NSTAR Gas. The annual allocation of goodwill amortization expense to the Company is approximately $8 million. Critical Accounting Policies The accompanying consolidated financial statements for each period presented include the activities of Boston Edison's wholly owned subsidiaries. All significant intercompany transactions have been eliminated. Certain reclassifications have been made to the prior year data to conform to the current presentation. a. Regulatory - Accounting Boston Edison follows accounting policies prescribed by the FERC and the MDTE. In addition, Boston Edison is subject to the accounting and reporting requirements of the SEC. The accompanying condensed consolidated financial statements conform to generally accepted accounting principles (GAAP). As a rate- regulated company, Boston Edison is subject to the Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation" (SFAS 71). The application of SFAS 71 results in differences in the timing of recognition of certain expenses from that of other businesses and industries. The energy delivery business remains subject to rate-regulation and continues to meet the criteria for application of SFAS 71. This rate-making process results in the recording of regulatory assets based on current and future cash inflows. As of September 30, 2002 and December 31, 2001, Boston Edison has recorded regulatory assets of $951 million and $769 million, respectively. Boston Edison continuously reviews these assets to assess its ultimate recoverability within the approved regulatory guidelines. Boston Edison anticipates to fully recover in its rates these regulatory assets. However, impairment risk associated with these assets relates to potentially adverse legislative, judicial or regulatory actions in the future. Plant and other regulatory assets related to the generation business are recovered through the transition charge. Boston Edison has long-term purchased power agreements that are used primarily to meet its standard offer obligation. The majority of these agreements are above-market and are not reflected on the accompanying Condensed Consolidated Balance Sheets. However, effective April 1, 2002, Boston Edison has marked to market one purchased power contract that is reflective of above-market costs. The above-market value of this contract is reflected as a component of power contracts on the accompanying Condensed Consolidated Balance Sheets. Refer to "Critical Accounting Policies," Item d. "Derivative Instruments" below for a further discussion. The above-market costs of all these contracts are currently being recovered through the transition charge as these costs are incurred. This recovery occurs through 2016. This recovery period coincides with the contractual terms of these purchased power agreements. Furthermore, standard offer and default service revenues are adjusted periodically to recover actual costs provided. Standard offer and default service revenues are recognized based on these approved rates for energy delivery. Refer to "Retail Electric Rates" in this MD&A for a further discussion. b. Pension and Other Postretirement Benefits Boston Edison is the sponsor of NSTAR's Pension Plan (the Plan). As its sponsor, Boston Edison allocates the costs of the Plan among itself and the other NSTAR subsidiary companies based on a percentage of total direct labor charged to the Company. The Company's pension and other postretirement costs are dependent upon several factors and assumptions, such as the discount rate, the long-term rate of return of plan assets and health care trends. The Company's plan assets have been affected by significant declines in the equity markets in the past three years. These conditions are expected to impact the funded status of the Plan at year-end and pension and postretirement costs for 2003. Based on current estimates, the Company anticipates recognizing pension and other postretirement costs for 2003 of $25 million to $55 million above the 2002 level of $37 million. These costs would result in approximately $20 million to $40 million of incremental net pension and other postretirement expenses charged to expense in 2003. Boston Edison will record approximately 60% of the pension and other postretirement costs. As a result of the negative investment performance, it is probable that at December 31, 2002 the accumulated benefit obligation will exceed Plan assets. Therefore, it is also probable that the Company will be required to recognize an additional minimum liability as prescribed by the Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 87, "Employers' Accounting for Pensions" (SFAS 87) and SFAS No. 132, "Employers' Disclosures about Pensions and Postretirement Benefits." The additional minimum liability would result in the removal of Prepaid pension cost from Boston Edison's Consolidated Balance Sheet. The Company's prepaid pension balance was $238 million as of September 30, 2002. The liability and Prepaid pension adjustment would be recorded as a non-cash charge to Other Comprehensive Income (OCI), and would not affect the results of operations for 2002. The charge to OCI would be reversed in future periods at the time that the fair value of the trust assts exceeds the accumulated benefit obligation. Assuming there is no significant change in interest rates or equity market performance for the remainder of the year, the Company anticipates that the after-tax charge to OCI will be approximately $200 million to $300 million. The ultimate impact of the Plan's investment performance on the Company's financial position, results of operations and cash flows will not be known until the Plan's assets and liabilities are valued at December 31, 2002. The Plan currently meets the minimum funding requirements of the Employment Retirement Income Security Act of 1974. However, management is currently evaluating the extent to which it may make additional optional cash contributions to the Plan, the timing of each contribution and the impact on the additional minimum liability. Should management elect to increase the level of its cash contributions to the Plan, such cash requirements could be material to its cash flows. Management believes it has adequate access to capital resources to support these contributions. Pension and other postretirement costs and cash contributions beyond 2003 are largely dependent on the financial markets. In addition, the Company anticipates filing a request with the MDTE seeking an order to mitigate the non-cash charge to OCI and the increases in expected pension and other postretirement benefit costs and cash contributions. If approved, this request could potentially allow the Company to record a regulatory asset in lieu of a charge to OCI. The Company cannot determine whether the request to the MDTE will be approved or whether the approval would be sufficient to record a regulatory asset under SFAS 71. c. New Accounting Standards On July 5, 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations" (SFAS 143). This Statement, which is effective for NSTAR on January 1, 2003, establishes accounting and reporting standards for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. It applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or the normal operation of a long-lived asset, except for certain obligations of lessees. SFAS 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, the entity capitalizes the cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. Management is currently assessing the impact of SFAS 143 in light of its regulatory and accounting requirements. Management has identified several minor long-lived assets, including lease arrangements, and has determined that it is legally responsible to remove such property and comply with the requirement of this standard. However, based on the company's assessment of its potential liability and rate regulatory treatment for certain identified assets, the adoption of SFAS 143 had no effect on its results of operations, cash flows, or financial position. SFAS No. 144, "Accounting for the Impairment or Disposal of Long- Lived Assets" (SFAS 144), was effective January 1, 2002, and addresses accounting and reporting for the impairment or disposal of long-lived assets. SFAS 144, among other things, expands the reporting of discontinued operations to include all components of an entity with operations that can be distinguished from the rest of the entity and that will be eliminated from the ongoing operations of the entity in a disposal transaction. The implementation of SFAS 144 had no effect on the Company's results of operations or financial position. The FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" (SFAS 146) that requires entities to record a liability for costs related to exit or disposal activities when the costs are incurred. Previous accounting guidance required the liability to be recorded at the date of commitment to an exit or disposal plan. NSTAR is required to comply with SFAS 146 beginning January 1, 2003. NSTAR anticipates that the implementation of this standard will not have an adverse impact on its financial position or results of operations. As of January 1, 2001, Boston Edison adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", as amended by SFAS Nos. 137 and 138, (collectively, SFAS 133). SFAS 133 established accounting and reporting standards requiring every derivative instrument (including certain derivative instruments embedded in such contracts as fixed-price fuel supply and power contracts) be recorded on the Consolidated Balance Sheets as either an asset or liability measured at its fair value. Previously, all of the company's commodity purchased power contracts were exempt from this accounting treatment under the normal purchase and sales exception of SFAS 133. As a result, these contracts were not marked to market and have not been reflected on the accompanying Condensed Consolidated Balance Sheets. The impact of SFAS 133 is discussed in the following paragraph. d. Derivative Instruments Boston Edison adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133), effective January 1, 2001. The accounting for derivative financial instruments is subject to change based on the guidance received from the Derivative Implementation Group (DIG) of FASB. The DIG issued C15, on October 10, 2001, which specifically addressed the interpretation of clearly and closely related contracts that qualify for the normal purchase and sales exception under SFAS 133. The conclusion reached by the DIG was that contracts with a pricing mechanism that is subject to future adjustment based on a generic index that is not specifically related to the contracted service commodity, generally would not qualify for the normal purchase and sales exception. On April 1, 2002, the effective date of DIG C15, Boston Edison adopted the interpretation of this guidance and began marking to market certain of its long-term purchased power contracts that previously qualified for the normal purchase and sale exception. Boston Edison has one purchased power contract that contains components with pricing mechanisms that are based on a generic index, such as the GNP or CPI and are applied to in significant factors of these agreements. Therefore, as required by the interpretation of C15, Boston Edison has recorded this contract at fair value on its accompanying Condensed Consolidated Balance Sheets beginning in the second quarter of 2002. This action resulted in the recognition of a liability for the fair value of the above-market portion of this contract as of September 30, 2002 of approximately $266 million and is a component of Power contracts on the accompanying Condensed Consolidated Balance Sheets. Boston Edison has recorded a corresponding regulatory asset to reflect the future recovery of the above-market component of this contract through its transition charge. Therefore, as a result of this regulatory treatment, the recording of this contract on its accompanying Condensed Consolidated Balance Sheets does not result in an earnings impact. Boston Edison has other purchased power contracts in which the fair value is significantly above-market. However, these contracts have met the criteria for normal purchase and sales exception pursuant to SFAB 133 and C15 and have not been recorded on the accompanying Condensed Consolidated Balance Sheets. The above market portion of this contract is currently being recovered through the transition charge. Boston Edison will continue to monitor any further guidance that may result from FASB revisions and clarifications to SFAS 133. Based on Boston Edison's assessment to date, the adoption of SFAS 133 has not had a material effect on its results of operations, cash flows, or net assets. e. Revenue Recognition Boston Edison's revenues are based on authorized rates approved by the FERC and the MDTE and are recorded as energy services are delivered. Estimates of transmission, distribution and transition revenues for electricity delivered to customers but not yet billed are accrued at the end of each accounting period. Included as a component of transition revenue is the recovery of all above-market purchased power costs. The determination of unbilled revenues requires management to estimate the volume and pricing of electricity delivered to customers prior to actual meter readings. In determining its unbilled electric based revenues, Boston Edison compares the actual delivery of megawatthours (mWh) demanded (its territory load) to its actual monthly billed mWh sales. The difference in volume represents the level of unbilled mWhs. Dollars associated with the unbilled mWhs are calculated by multiplying these units by Boston Edison's approved distribution revenue rates. There is no inherent volatility in the rate used to determine unbilled revenue. Using this estimation methodology, there is minimal volatility in estimating this component of operating revenues. f. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make judgements, estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Certain of these accounting principles require subjective and complex judgements used in the preparation of financial statements. Accordingly, a different financial presentation could result depending on the judgement, estimates or assumptions that are used. Such estimates and assumptions, include, but are not specifically limited to: depreciation rates set by regulator, amortization terms, future interest rates, future discount rates, mark-to-market valuations, investments returns, impact of new accounting standards, future costs associated with long-term contractual obligations, future compliance costs associated with environmental regulations and continuing creditworthiness of third parties. Actual results could materially differ from those estimates. Rate and Regulatory Proceedings The 1999 MDTE order, which approved the rate plan associated with the merger of BEC and COM/Energy, was appealed by certain parties to the Massachusetts Supreme Judicial Court (SJC). In October 2001, the MDTE certified the record of the case to the SJC. The appeals of the Massachusetts Attorney General (AG) and a separate group that consists of The Energy Consortium (TEC) and Harvard University (Harvard) are pending. On June 21, 2002, TEC and Harvard filed their joint initial brief with the SJC and on June 24, 2002, the AG filed a brief in the consolidated proceeding. TEC and Harvard allege that, in approving the rate plan and merger proposal, the MDTE committed errors of law in the following areas: (1) in adopting a public interest standard, the MDTE applied the wrong standard of review, and failed to investigate the propriety of rates and to determine that the resulting rates of Boston Edison, Cambridge Electric, ComElectric and NSTAR Gas were just and reasonable; (2) that in permitting Cambridge Electric and ComElectric to adjust their rates by $49.8 million to reflect demand-side management costs, the MDTE failed to determine whether such an adjustment was warranted in light of other cost decreases; (3) that the MDTE's approval results in an arbitrary and unjustified sharing of benefits and costs between ratepayers and shareholders; and (4) that the MDTE's approval of the rate plan guarantees shareholders recovery of future costs without any future demonstration of customer savings. The AG's brief includes similar arguments in each of these areas and adds that, in allowing recovery of the acquisition premium, the MDTE has improperly deviated from a cost basis in setting approved rates and the ratemaking policies in other jurisdictions. Responsive briefs from NSTAR and the MDTE were filed on August 30, 2002 and September 9, 2002, respectively. Reply briefs were filed by TEC/Harvard and the AG on September 27, 2002 and October 3, 2002, respectively. On November 4, 2002, oral arguments occurred before the SJC. Management is currently unable to determine the outcome of this proceeding. Boston Edison intends to vigorously defend its position relative to this appeal. However, if an unfavorable outcome were to occur, there could be a material adverse impact on business operations, the consolidated financial position, cash flows and the results of operations for the reporting period in which the unfavorable outcome occurs. Service Quality Plans On October 29, 2001, and as subsequently updated, NSTAR Electric filed proposed service quality plans for each company with the MDTE, which included guidelines that had been established by the MDTE as a result of its generic investigation of service quality issues. The service quality plans established performance benchmarks effective January 1, 2002 for certain identified measures of service quality relating to customer service and billing performance, customer satisfaction, and reliability and safety performance. NSTAR Electric is required to report annually concerning its performance as to each measure and is subject to maximum penalties of up to two percent of transmission and distribution revenues should performance fail to meetexceeded the applicable benchmarks. NSTAR Electric also filed with the MDTE a report concerning its performance on the identified service quality measures for the two twelve-month periods ended August 31, 2000 and 2001. This report included a calculation of penalties in accordance with MDTE guidelines as if such guidelines were in effect during the period. On March 22, 2002, following hearings on the matter, the MDTE issued an order imposing a service quality penalty of approximately $3.25 million on NSTAR Electric of which $3.2 million related specifically to Boston Edison that was refunded to customers as a credit to their bills during the month of May 2002. As a result of the accrual for this estimated penalty during 2001, this refund had no effect on Boston Edison's consolidated financial position or results of operations in 2002. Through September 30, 2002 Boston Edison Electric's performance has resulted in a minimal penalty situation based on both actual results through September 2002 and forecasted results for the remaining three-month period. However,established benchmarks; however, these results may not be indicative of the results that may be expected for the remainder of the year. Boston Edison accounts for its service quality penalties pursuant to SFAS No. 5, "Accounting for Contingencies." Accordingly, these penalties are monitored on a monthly basis to determine Boston Edison's contingent liability, and if Boston Edison determines it is probable that a liability has been incurred and is estimable, Boston Edison would then accrue an appropriate liability. Annually, each NSTAR Electric Company,year, including Boston Edison, makes a service quality performance filing with the MDTE. Any settlement or rate order that would result in a different liability (or credit) level from what has been accrued would be adjusted inpeak-demand period anticipated during the period an agreement is received from the MDTE.summer period. c. Retail Electric Rates The 1997 Restructuring Act requires electric distribution companies to obtain and resell power to retail customers through either standard offer service or default service for those who choose not to buy energy from a competitive energy supplier through either standard offer service or default service.supplier. Standard offer service will be available to eligible customers through February 2005 at prices approved by the MDTE, set at levels so as to guarantee mandatory overall rate reductions provided by the Restructuring Act. New retail customers in the Boston Edison service territoriesterritory and other customers who are no longer eligible for standard offer service and have not chosen to receive service from a competitive supplier are provided default service. The price of default service is intended to reflect the average competitive market price for power. As of September 30, 2002March 31, 2003 and December 31, 2001,2002, customers of Boston Edison had approximately 27%19% and 19%28%, respectively, of itstheir load requirements provided by competitive suppliers. As of December 31, 2000, Boston Edison's accumulated costThe decline in customers served by competitive suppliers declined due to provide default and standard offer service waschanges in excess of the revenues it was allowed to bill by approximately $193.6 million.market pricing. On January 1 and July 1, 2001,April 24, 2003, Boston Edison was permitted byreceived approval from the MDTE to increase its rates to customers for standard offer and default service to collect this shortfall. Furthermore, when combined with the reduction in energy supply costs experienced in 2001 and through the first halfinclude a Standard Offer Service Fuel Adjustment of 2002, rates were reduced on January 1, 2002, April 1, 2002 and July 1, 2002. In December 2000, the MDTE approved a standard offer fuel index of 1.3210.902 cents per kilowatt-hour (kWh) that waswill be added to each NSTAR Electric company'sBoston Edison's standard offer service rates forrate effective May 1, 2003. The higher rate is necessary due to the first half of 2001. In June 2001, the MDTE approved an additional increase of 1.23 cents per kWh effective July 1, 2001 based on a fuel adjustment formula contained in its standard offer tariffs to reflect the prices of natural gas and oil. In December 2001, the MDTE approved a decrease in this fuel index of 1.125 cents to 1.426 cents per kWh for the first quarter of 2002 based on a decrease in the cost of fuel. Effective April 1, 2002, each NSTAR Electric Company's fuel index was set to zero. The MDTE has ruled that these fuel index adjustments are excluded from the 15% rate reduction requirement under the Restructuring Act. In December 2001, NSTAR filed proposed transition rate adjustments for 2002, including a preliminary reconciliation of costs and revenues through 2001. The MDTE subsequently approved tariffs for each retail electric subsidiary effective January 1, 2002. The filings were updated in February 2002 to include final costs for 2001. The MDTE approved the reconciliation of costs and revenues for Boston Edison through 2000 in its approval on November 16, 2001 of a Settlement Agreement between Boston Edison and the Massachusetts Attorney General resolving all outstanding issues in Boston Edison's prior reconciliation filings. As a part of this settlement, Boston Edison agreed to reduce the costs sought to be collected through the transition charge by approximately $2.9 million as compared to the amounts that were originally sought. This settlement did not have a material adverse effect on Boston Edison's consolidated financial position, results of operations or cash flows. Other Legal Matters In the normal course of its business, Boston Edison and its subsidiaries are also involved in certain legal matters, including civil lawsuits.litigation. Management is unable to fully determine a range of reasonably possible court-ordered damages, settlement amounts, and related litigation costs ("legal liabilities") that would be in excess of amounts accrued. Based on the information currently available, the CompanyBoston Edison does not believe that it is probable that any such additional costslegal liability will have a material impact on its consolidated financial position. However, it is reasonably possible that additional legal liabilities costs that may result from changes in estimates could have a material impact on its results of operations for a reporting period. Results of Operations - Three Months Ended September 30, 2002March 31, 2003 vs. Three Months Ended September 30, 2001March 31, 2002 The following section of MD&A compares the results of operations for each of the three monthsquarters ended September 30,March 31, 2003 and 2002, and 2001, respectively, and should be read in conjunction with the condensed consolidated financial statements and the accompanying notes included elsewhere in this report. Net income was $71.5$19.0 million for the three months ended September 30, 2002March 31, 2003 compared to $82.3$16.9 million for the same period in 2001, a 14% decrease.2002, an increase of 12%. The results of operations for the three-month periodquarter are not indicative of the results thatwhich may be expected for the entire year due to the seasonality of kilowatt-hour (kWh) sales and revenues. Refer to the accompanying Note BA to the accompanying Unaudited Condensed Consolidated Financial Statements.
The following is a summary of retail electric energy sales for the periods indicated: Three Months Ended March 31, 2003 2002 % Change Retail Electric Sales - MWH Residential 1,178,996 1,022,236 15.3 Commercial 2,305,117 2,127,890 8.3 Industrial 304,205 328,449 (7.4) Other 40,648 41,274 (1.5) Total retail sales 3,828,966 3,519,849 8.8 ========= =========
Weather conditions greatly impact the change in electric revenues in Boston Edison's service area. The first quarter period of 2003 was significantly colder than the same period in 2002. Below is comparative information on heating degree days for the three-month periods ending March 31, 2003 and 2002 and the number of degree days in a "normal" first quarter period as represented by a 30-year average.
Normal 30-Year 2003 2002 Average Heating degree days 3,181 2,429 2,870 Percentage change from prior year 31.0% (16.8)% Percentage change from 30-year average 10.8% (15.3)%
Operating revenues
Operating revenues decreased $153.8 million or 25% for the three- month period ended September 30, 2002 as compared tofirst three months of 2003 decreased 8.8% from the same period in 20012002, primarily resulting from decreases in electric rates. The major revenue components were as follows: (in thousands) Retail electric revenues $ (143,794)(28,405) Wholesale revenues (5,560)(9,585) Other revenues (4,457)1,975 Decrease in operating revenues $ (153,811)(36,015) ==========
Retail revenues were $344.9 million in 2003 compared to $373.3 million in 2002, a decrease of $28.4 million, or 8%. The mostdecline in retail revenues reflects the significant factor contributing to this decreasedecreases in operating revenues was the reduction inboth standard offer and default service rates charged to customers. Retail revenues were $432.4 millionoffset, in part, by the third quarterimpact of 2002 compared to $576.2 millionan 8.8% increase in the same period of 2001, a decrease of $143.8 million, or 25%. Lowerretail energy sales. The lower rates implemented in January April and July 20022003 for standard offer and default services accounted for a decreasedecreases in retail revenues of $72.1$41.6 million and $55.1$6.1 million, respectively. Transition revenues were $13.4 million higher in the current quarter while distribution revenues increased by $19.7$6.9 million and transmission revenues increased $2.6 million. The increases in each of these components of revenue were due primarily to the securitization true-up adjustment, as noted below, and to higher rates for transition cost recovery offset by a $2.2 million declineincrease in earned mitigation incentive revenues that were allowed for successfully lowering transition charges. Transmission revenues increased by $1.7 million partially due to the Company's recently completed true-up filing.retail energy sales. The change in retail revenues related to standard offer and default services are fully reconciled to the costs incurred and have no impact on net income. On October 7, 2002, Boston EdisonAs shown in the table above, the 8.8% increase in the current quarter's retail MWH sales primarily reflects higher sales in the residential and the AG (Settling Parties), submitted for approval by the MDTE a Joint Motion for Approval of Settlement Agreement and a Settlement Agreement resolving issues incommercial sectors. Boston Edison's reconciliationsales to residential and commercial customers were approximately 31% and 60%, respectively, of costs and revenuesits total retail sales mix for the year 2001. Among other issues,current quarter and provided nearly all of its distribution revenue. The 7.4% decline in industrial sector sales reflects the Settlement Agreement includes an adjustment relating to the true-upcontinued slowdown in economic conditions that resulted from reduced production or facility closings. The industrial sector comprises approximately 8% of costs relating to securitization. As a result of this Settlement Agreement with the AG and an opinion from NSTAR's regulatory counsel, Boston Edison recognized approximately $11.4Edison's energy sales. Wholesale revenues were $7.6 million in transition charge revenues. This benefit was significantly offset by other regulatory true-up adjustments. Management anticipates final approval by the MDTE in the fourth quarter. However, should the MDTE issued a final adverse decision, it could have a material impact on its results of operations for a particular reporting period. Warmer weather conditions that were 34% above normal for the third quarter of 2002 impacted the margin for electric sales. Below is comparative information on cooling degree days for the three-month periods ending September 30, 2002 and 2001 and the number of degree days in a "normal" third quarter period as represented by a 30-year average. A "cooling degree-day" is a unit measuring how much the outdoor mean temperature rises above a base of 65 degrees. Each degree below or above the base, is measured in one degree day.
Normal 30-Year Average 2002 2001 Cooling degree days 792 526 593 Percentage change from prior year 50.6% 26.1% Percentage change from 30-year average 33.6% (11.3)%
Wholesale electric revenues were $12.42003 compared to $17.2 million in the third quarter of 2002, compared to $17.9 million in the same period of 2001, a decrease of $5.5$9.6 million, or 31%56%. This decrease in wholesale revenues primarily reflects decreaseda decrease in kWh sales of 35.14%62% due to the expiration of twothree municipal power supply contracts on May 31, 2002 and a decline in rates.during 2002. Amounts collected from wholesale customers have no impact on results of operations.net income. Other revenues were $23.7$21.5 million in the thirdfirst quarter of 20022003 compared to $28.2$19.5 million in the same period of 2001,2002, an decreaseincrease of $4.5$2 million, or 16%10%. The decreaseThis increase primarily reflects the absence in 2002 of a $4.2 million FERC-approved settlement withhigher transmission contract customers.revenues. Operating expenses PurchasedDespite higher retail unit sales of 8.8%, purchased power costs were $199.4$189.8 million in the thirdfirst quarter of 20022003 compared to $343.5$232.6 million in the same period of 2001,2002, a decrease of $144$42.8 million, or 42%18%. The decrease in expense reflects a 31%the decrease in wholesale sales and lower costs that reflect the prices offor natural gas and oil. The net changedecrease in expense also includes the current quarter also reflectsrecognition of $28.4 million relating to the impact of the under-recovery ofdeferred standard offer and default service supply costs of $27.1 million as a credit to expense as compared to an over-recoveryfor current period under-collection of these costs of a $67.1 million change in the same period last year.costs. Boston Edison adjusts its electric rates to collect the costs related to energy supply from customers on a fully reconciling basis. Due to the rate adjustment mechanisms, changes in the amount of energy supply expense have no impact on earnings. Operations and maintenance expense was $56.4$53.4 million in 2003 compared to $53.7 million in 2002, compared to $50.4 million in 2001, an increasea decrease of $6.0$0.3 million, or 12%less than 1%. This increasedecrease reflects anreduced maintenance expense of $3.7 million due primarily to improvements made in electric distribution services in 2002. This decrease was offset by increases in benefits costs of $1.5 million and customer service of $1.6 million, the latter reflecting the increase in pension costs as well as increases in other benefit costs due to a downturn in the equity markets, lower interest costs and health care costs. These increases were partially offset by reduced labor costs and the absence of storm related costs during 2002 resulting from milder weather conditions.retail sales. Depreciation and amortization expense was $43.1$42.9 million in 2003 compared to $42.8 million in 2002, compared to $42.5 million in 2001, an increase of $0.6$0.1 million, or less than 1%. The increase reflects a slightly higher level of depreciable plant in service. Demand side management (DSM) and renewable energy programs expense was $12.3$12 million in the thirdfirst quarter of 20022003 compared to $13.7$11.2 million in the same period of 2001, a decrease2002, an increase of $1.4$0.8 million, or 11%, primarily due to the7%. The timing of DSM expense which is consistent with the collection of conservation and renewable energy revenues. These costs are collected from customers on a fully reconciling basis and therefore, fluctuations in program costs have no impact on earnings, other than incentive amounts earned by the company in return for increased customer participation.earnings. Property and other taxes were $17.1$18.2 million in 2002 compared to $16.4 million in 2001, an increase of $0.7 million, or 5%. The increase is due to higherboth 2003 and 2002. Higher overall municipal property taxes, particularly for the City of Boston, were offset by lower payroll taxes relating to other communities.taxes. Income taxes from operations were $47.5$12.8 million in 2003 compared to $11.9 million in 2002, compared to $53.0 million in 2001, a decreasean increase of $5.5$0.9 million, or 11%8%. This decreaseincrease reflects lowerhigher pre-tax operating income in 2002. Other income, net Other income, net was $1.9 million in 2002 compared to other income, net of $0.3 million in the same period of 2001, a net increase in other income, net of $1.6 million, due primarily from income earned in connection with the sale of certain property.2003. Interest charges Interest on long-term debt and transition property securitization certificates was $20.1$23.7 million in 2003, compared to $20.9 million in 2002, compared to $22.0an increase of $2.8 million, or 13%. The increase reflects the impact of the issuance of $500 million in 2001, a decrease of $1.9 million, or 9%. Approximately $1long-term debt ($400 million of 4.875% 10-year debentures and $100 million of 3-year floating rate debentures) in October 2002 partially offset by the decrease is relatedabsence of $1.2 million in interest on the 8.25% debentures that were retired in September 2002 and a $1.1 million decline in interest on the securitization certificates due to securitization certificate interest reflecting the scheduled retirement of this debt. The remaining decrease relates to a decrease in interest on long-term debt and is the result of the retirement of $24.3 million, 9.375% debentures in August 2001. Short-term debt and other interest charges were $3 million in 2002 compared to a net benefit of $0.5 million in 2001, an increase of $3.5 million due to a reduction in regulatory interest resulting from reductions in the under-collection of regulatory deferrals offset by a significant decline in short- term borrowing rates. Results of Operations - Nine Months Ended September 30, 2002 vs. Nine Months Ended September 30, 2001 Net income was $112.9 million for the nine months ended September 30, 2002 compared to $143 million for the same period in 2001, a 21% decrease. The results of operations for the nine month period are not indicative of the results which may be expected for the entire year due to the seasonality of kWh sales and revenues. Refer to Note B to the accompanying Condensed Consolidated Financial Statements. Operating revenues
Operating revenues decreased $299.6 million or 19% during the nine months ended September 30, 2002 as follows: (in thousands) Retail electric revenues $ (285,759) Wholesale revenues (15,476) Other revenues 1,623 Decrease in operating revenues $ (299,612) ==========
Retail revenues were $1,158.9 million in 2002 compared to $1,444.6 million in 2000, a decrease of $285.7 million, or 20%. The change in retail revenues includes lower rates implemented in January, April and July 2002 for standard offer and default service and a 0.3% decrease in retail kilowatt-hour (kWh) electric sales. Transition revenues increased by $29.3 million due primarily to the securitization true-up adjustment, as noted below, and to higher rates for transition cost recovery offset by a $6.3 million decline in earned mitigation incentive revenues that were allowed for successfully lowering transition charges. Boston Edison will continue to earn mitigation incentive revenue as it lowers its transition charge through 2009. The revenues related to standard offer and default services are fully reconciled to the costs incurred and have no impact on net income. Wholesale electric revenues were $44.8 million in 2002 compared to $60.3 million in 2001, a decrease of $15.5 million, or 26%. This decrease in wholesale revenues reflects decreased kWh sales of 20.7%, primarily as the result of decreased demand resulting from the expiration of two municipal contracts on May 31, 2002. After October 31, 2005, the Company will no longer have contracts for the supply of wholesale power. Amounts collected from wholesale customers are credited to retail customers through the transition charge. Therefore, the expiration of these contracts has no impact on results of operations. Other revenues were $62 million in 2002 compared to $60.4 million in 2001, an increase of $1.6 million, or 3%. The increase reflects higher Regional Network Services transmission revenues. Operating expenses Purchased power costs were $625.9 million in 2002 compared to $900.5 million in 2001, a decrease of $274.6 million, or 31%. The decrease reflects lower purchased power requirements due to a 0.3% decrease in retail sales, a 26% decrease in wholesale sales and lower costs that reflect the lower prices of natural gas and oil. The net change in the current nine-month period also reflects the impact of the under-recovery of standard offer and default service supply costs of $9.4 million as a credit to expense as compared to an over-recovery of these costs of a $152.3 million change in the same period last year. Boston Edison adjusts its electric rates to collect the costs related to energy supply from customers on a fully reconciling basis. Due to the rate adjustment mechanisms, changes in the amount of energy supply expense have no impact on earnings. Operations and maintenance expense was $169.1 million in 2002 compared to $143.9 million in 2001, an increase of $25.2 million, or 18%. This increase primarily reflects non-recurring corrective electric systems maintenance costs and increased pension related benefit costs of $13.2 million. Depreciation and amortization expense was $128.9 million in 2002 compared to $126.4 million in 2001, an increase of $2.5 million, or 2%. The increase reflects higher level of depreciable plant in service. Demand side management (DSM) and renewable energy programs expense was $34.4 million in 2002 compared to $40.8 million in 2001, a decrease of $6.4 million, or 16% primarily due to the timing of DSM expense which is consistent with the collection of conservation and renewable energy revenues. These costs are collected from customers on a fully reconciling basis and therefore, fluctuations in program costs have no impact on earnings, other than incentive amounts earned by the company in return for increased customer participation. Property and other taxes were $52.8 million in 2002 compared to $51.3 million in 2001, an increase of $1.5 million, or 3% due to higher municipal property taxes for the City of Boston of $3.5 million offset by a decrease in rates of approximately $1.7 million in municipal property taxes in the Company's service area, excluding the City of Boston. Income taxes from operations were $76.0 million in 2002 compared to $92.9 million in 2001, an decrease of $16.9 million, or 18.2%. This decrease reflects lower pretax operating income in 2002. Other income, net Other income, net was $2.8 million in 2002 compared to income of $3.6 million in the same period of 2001, a net decrease in other income, net of $0.8 million. The decrease was primarily due to the absence in 2002 of the sale of equity securities in connection with the demutualization of John Hancock and MetLife. Interest charges Interest on long-term debt and transition property securitization certificates was $61.5 million in 2002 compared to $66.8 million in 2001, a decrease of $5.3 million, or 8%. Approximately $3.2 million of the decrease is related to securitization certificate interest reflecting the scheduled retirement of this debt. The decrease in interest on long-term debt is primarily the result of a reduction of approximately $1.7 million due to the retirement of $24.3 million of 9.375% debentures during the third quarter of 2001. Other interest charges were $7.5$2.5 million in 2002 compared to $5.3 million in 2001, an increaseboth 2003 and 2002. The impact of $2.2 million. The increase reflects a $6.5 million increase in the carrying charges due the Company associated with reductions in the levelshort-term borrowing rates and levels of under- collected regulatory deferrals. The higher level of short-term borrowings were offset by a significantly lower rates resultingan increase in lower interest cost savings of $3.9 million. Performance Assurances and Financial Guarantees Boston Edison has entered into a series of purchased power agreements to meet its default and standard offer service supply obligations through December 31, 2002. These agreements are generally for a term of six months to twelve months. The company is currently negotiating with suppliers and anticipates having purchased power agreements in place to service its Default Service and Standard Offer obligation in 2003 under similar terms as those in the past. Boston Edison currently is recovering payments it is making to suppliers from its customers. Most of the Boston Edison's power suppliers are subsidiaries of larger companies with investment grade or better credit ratings. In many cases, Boston Edison has financial assurances and guarantees in place with the parent company of the supplier, to minimize Boston Edison risk in the event the supplier encounters financial difficulties or otherwise fails to perform. In addition, under these agreements, in the event that the supplier (or its parent guarantor) fails to maintain an investment grade credit rating, it is required to provide additional security for performance. Boston Edison's policy is to enter into power supply arrangements only if the supplier (or its parent guarantor has an investment grade or better credit rating. In view of current turmoil in the energy supply industry, Boston Edison is unable to determine whether its suppliers (or their parent guarantors) will become subject to financial difficulties, or whether these financial assurances and guarantees are sufficient. In such event, the supplier (or its guarantor) may not be in a position to provide the required additional security, and Boston Edison may then terminate the agreement. Some of these agreements include a reciprocal provision, where in the unlikely event that an Boston Edison distribution company receives a credit rating below investment grade, that company could be required to provide additional security for performance, such as a letter of credit. Item 3. Quantitative and Qualitative Disclosures about Market Risk There have been no material changes since year-end.regulatory interest. Item 4. Controls and Procedures Boston Edison's disclosure controls and procedures are designed to ensure that information required to be disclosed in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Within 90 days prior to the date of filing this Quarterly Report on Form 10-Q, Boston Edison carried out an evaluation, under the supervision and with the participation of Boston Edison's management, including Boston Edison's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of Boston Edison's disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that Boston Edison's disclosure controls and procedures are effective in(1) to timely alertingalert them to material information relating to Boston Edison's information required to be disclosed by Boston Edison in the reports that it files or submits under the Securities Exchange Act of 1934. These reports are1934 (2) to ensure that appropriate information is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. Subsequent to the date of that evaluation, there have been no significant changes in Boston Edison's internal controls or in other factors that could significantly affect internal controls, nor were any corrective actions required with regard to significant deficiencies and material weaknesses. Part II - Other Information Item 1. Legal Proceedings In the normal course of its business, Boston Edison and its subsidiaries are involved in certain legal matters, including civil litigation. Management is unable to fully determine a range of reasonably possible court-ordered damages, settlement amounts, and related litigation costs ("legal liabilities") that would be in excess of amounts accrued. Based on the information currently available, Boston Edison does not believe that it is probable that any such additional legal liability will have a material impact on its consolidated financial position. However, it is reasonably possible that additional legal liabilities that may result from changes in estimates could have a material impact on its results of operations for a reporting period. Item 5. Other Information The following additional information is furnished in connection with the Registration Statements on Form S-3 of the Registrant (File Nos. 33-57840 and 333-55890), filed with the Securities and Exchange Commission on February 3, 1993 and February 20, 2001, respectively.
for informational purposes. Ratio of earnings to fixed charges and ratio of earnings to fixed charges and preferred stock dividend requirements:
Twelve months ended September 30, 2002:March 31, 2003: Ratio of earnings to fixed charges 2.602.95 Ratio of earnings to fixed charges and preferred stock dividend requirements 2.542.87
Item 6. Exhibits and Reports on Form 8-K a) Exhibits:Exhibits filed herewith or incorporated by reference (as indicated): Exhibit 4 - Instruments definingDefining the rightsRights of security holders, including indenturesSecurity Holders, Including Indentures 4.1 Revolving Credit Agreement dated November 15, 2002 (filed herewith) Management agrees to furnish to the SECSecurities and Exchange Commission, upon request, a copy of any agreementsagreement or instrumentsinstrument defining the rights of holders of any long-term debt whose authorization does not exceed 10% of total assets Exhibits filed herewith: Exhibit 12 - Statement re Computation of ratio of earnings to fixed chargesRatios 12.1 - Computation of ratioRatio of earningsEarnings to fixed chargesFixed Charges for the twelve months ended June 30, 2002Twelve Months Ended March 31, 2003 (filed herewith) 12.2 - Computation of ratioRatio of earningsEarnings to fixed chargesFixed Charges and preferred stock dividend requirementsPreferred Stock Dividend Requirements for the twelve months ended June 30, 2002Twelve Months Ended March 31, 2003 (filed herewith) Exhibit 99 - Additional exhibitsExhibits 99.1 - Report of Independent Accountants 99.2 - Certification Statement of Chief Executive Officer of Boston Edison Company pursuant to Section 906 of the Sarbanes - OxleySarbanes-Oxley Act of 2002 99.3 -(filed herewith) 99.2 Certification Statement of Chief Financial Officer of Boston Edison Company pursuant to Section 906 of the Sarbanes- OxleySarbanes-Oxley Act of 2002.2002 (filed herewith) 99.3 Report of Independent Accountants b) NoReports on Form 8-K: A report on Form 8-K was filed duringon January 3, 2003 following the third quarterMDTE approval received on December 20, 2002 to allow the Company to defer as a regulatory asset, an additional minimum liability, and the difference between the level of 2002.pension and postretirement benefits that is included in rates and the amounts that would have been recorded under SFAS 87 and SFAS 106 in 2003.
Signature Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
BOSTON EDISON COMPANY (Registrant) Date: November 14, 2002May 9, 2003 /s/ R.Robert J. WEAFER, JR.Weafer,Jr. Robert J. Weafer, Jr. Vice President, Controller and Chief Accounting Officer
Sarbanes - Oxley Section 302(a) CertificationsCertification I, Thomas J. May, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Boston Edison; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of Boston Edison as of, and for, the periods presented in this quarterly report; 4. Boston Edison's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for Boston Edison and we have: a) designed such disclosure controls and procedures to ensure that material information relating to Boston Edison, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of Boston Edison's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report are our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. Boston Edison's other certifying officer and I have disclosed, based on our most recent evaluation, to Boston Edison's auditors and the audit committee of NSTAR's board of trustees: a) all significant deficiencies in the design or operation of internal controls which could adversely affect Boston Edison's ability to record, process, summarize and report financial data and have identified for Boston Edison's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. Boston Edison's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002May 9, 2003 By: /s/ THOMAS J. MAY Thomas J. MAY Thomas J. May Chairman, President and Chief Executive Officer
May Chairman, President and Chief Executive Officer Sarbanes - Oxley Section 302(a) Certification I, James J. Judge, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Boston Edison:Edison; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of Boston Edison as of, and for, the periods presented in this quarterly report; 4. Boston Edison's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d- 14)15d-14) for Boston Edison and we have: a) designed such disclosure controls and procedures to ensure that material information relating to Boston Edison, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of Boston Edison's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report are our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. Boston Edison's other certifying officer and I have disclosed, based on our most recent evaluation, to Boston Edison's auditors and the audit committee of NSTAR's board of trustees: a) all significant deficiencies in the design or operation of internal controls which could adversely affect Boston Edison's ability to record, process, summarize and report financial data and have identified for Boston Edison's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in Boston Edison'sthe registrant's internal controls; and 6. Boston Edison's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14,2002May 9, 2003 By: /s/ JAMES J. JUDGE James J. Judge Senior Vice President, Treasurer and Chief Financial Officer